Sunday, October 21, 2012

“We don't hide anything in the nuclear industry!“ - A visit in EDF's Nuclear Power Plant in Nogent-sur-Seine

Last Tuesday, I woke up early. At 6h50 A.M., I had a meeting at Porte Maillot with my HEC EMBA Energy Major fellows to take a bus to Nogent-sur-Seine to visit EDF's nuclear power plant (NPP) in Nogent-sur-Seine.

After roughly 2 hours in the bus, it is now 9h50 A.M. and I am sitting in a conference room in Nogent-sur-Seine. A charming blonde women introduces herself: „My name is Anne-Sophie – Welcome to EDF!“ Outside, it is cold and cloudy. It starts raining. Nonetheless, the Anne-Sophie is smiling all over her face.

Sometimes, my brain thinks faster than it actually should: „Anne-Sophie, well-dressed and probably around 30 years old, must undoubtedly work in EDF's marketing or communications department. She will now tell us how great EDF and nuclear power are.“

EDF and its focus on nuclear energy

What is EDF doing?“, asks Anne-Sophie and gives herself the answer: „the whole range of energy products, from generation, over transmission and distribution, over marketing, to trading.“

Then she decribes EDF's nuclear energy stance in France:

  • EDF runs 17 nuclear power plants in France, all of them pressurized water ractors.

  • 89 % of EDF's energy mix in France consists of nuclear power.

  • The most recent NPP is Flammanville and has adopted the EPR (European Pressurized Reactor) technology. Its construction costs account for 6 BEUR.

Supplementary to nuclear energy, EDF is also one of Europe's leading producer of renewable energy. This will be the only time Anne-Sophie talks about energy forms other than nuclear. This seems logic – After all, we came to visit a nuclear power plant!

Functioning of a pressurized water reactor

The NPP in Nogent-sur-Seine consists of three separate circuits:

  • 1st circuit: Inside the reactor, the nuclear fission heats pressurized water (155 bar) up to 2000° Celsius.
  • 2nd circuit: Heated water of the first circuit generates steam in the second circuit. This steam drives a turbine that will generate electricity.
  • 3rd circuit: The steam condensates and is then either reused or ejected in the air, via the cooling tower.

On sight, we can distinguish these three cycles easily, as they correspond to the 3 buildings (reactor, turbine building, and cooling tower) of each unit of production.

Nuclear Chain Reaction

Anne-Sophie describes the nuclear chain reaction which happens in the reactor.

I admit that I don't really understand what she is talking about. At the same time, I start feeling bad. No, Anne-Sophie cannot belong to the marketing or communications department... Can these people explain a nuclear chain reaction? Probably not – Shame on me!

Fuel Production and Fuel Charging Process

The next topic in Anne Sophie's presentation is the production and charging of uranium fuel. Showing pictures and citing figures, she expands on the steps of nuclear fuel production:

One nuclear reactor contains 110 tons of uranium; the service life of a fuel assembly and its uranium is 5 years.

At this stage of her presentation, Anne-Sophie has definitely convinced me. Forget about marketing and communications! She must be an engineer!

Unfortunately, it is just a few minutes after having convinced me that Anne-Sophie pronounces, still smiling, this phrase that will definitely disclose her real identity: “We don't hide anything in the nuclear industry.” I turn to my group and see many people smiling. They suddenly seem to trust Anne-Sophie less than before...

The Cooling Tower

It's time to go for a walk. Before facing the rain outside, I take helmet, earphones, and earplugs. Our group is subdivided in two groups. Disappointed by Anne-Sophie, I join the group lead by Alexandre.

The earphones turn out very useful. Everybody can easily walk around and follow Alexandre's explanations without gathering constantly next to our guide but still understanding only half of his talk.

First some basic facts: 900 people on sight during operations, up to 2,000 people during outage, due to fueling and maintenance.

We arrive at the security checkpoint. Each of us validates his badge and, in addition, enters his specific security number.

After crossing the checkpoint, you can read the slogan “Sûreté et Sécurité: Nos priorités pour mieux produire” which means “Safety and Security: Our priorities to better perform.”. Not being an engineer, I ask a colleague what is the difference between safety and security. “Safety is for people, security is for material”, is his short answer – or was it the other way around? Anyway, I got the message: “Don't worry, nuclear energy is safe because everybody pays attention to what he is doing here.”

When walking towards the cooling tower, Alexandre has another way to explain the functioning of the nuclear power plant: “Thermal energy is transformed into mechanical energy which is then transformed into electrical energy”. That seems easy, even for me.

We arrive at the cooling tower of the first unit. Standing in front of it, it is simply huge! Alexandre adds some figures:

  • Height of the cooling tower: 100 m
  • Width of the concrete wall: 1.50 m on the bottom and 0.60 m on top

The cooling tower is build on 20 m high pillars. On the bottom, it is partially open to guarantee an efficient flow of air inside the tower.

The Steam Turbine

The next step of our visit leads us into a factory that is approximately 100 m long. Inside, we can see a tremendous yellow box containing the 57 m long turbine. As maintenance works will start soon, the case is sparsely open and we can see the turbine running inside. Alexandre tells us that the steam must have a constant pressure of 70 bar to produce electricity of 50 Ohm.

Unfortunately”, reactor and control room cannot be visited. That's why we face again the rain outside and our visit will finish soon. Before leaving the site, everybody has to pass through a control system to be sure that nobody has captured radioactivity.

In two hours, I will be in Paris again. Time enough to think and discuss a little bit about nuclear energy. Whatever you think about it, one thing is clear: Our visit at EDF premises was very well organized, our guides were very competent, and EDF has given a very professional and safe image of its nuclear power plant in Nogent-sur-Seine.

Sunday, October 14, 2012

The Wheatley Review of LIBOR – Why setting and applying law are not the same!

Marcus Junianus Justinus
Historiarum Philippicarum libri XLIV – Liber III

Dum haec in Persis geruntur, interea Graecia omnis ducibus Lacedaemoniis et Atheniensibus in duas diuisa partes ab externis bellis uelut in uiscera sua arma conuertit. Fiunt igitur de uno populo duo corpora, et eorundem castrorum homines in duos hostiles exercitus diuiduntur. Hinc Lacedaemonii communia quondam ciuitatum auxilia ad uires suas trahebant, inde Athenienses et uetustate gentis et gestis rebus inlustres propriis uiribus confidebant. Atque ita duo potentissimi Graeciae populi institutis Solonis et Lycurgi legibus pares ex aemulatione uirium in bellum ruebant. Namque Lycurgus cum fratri suo Polydectae, Spartanorum regi, successisset regnumque sibi uindicare potuisset, Charillo, filio eius, qui natus postumus erat, cum ad aetatem adultam peruenisset, regnum summa fide restituit, ut intellegerent omnes, quanto plus apud bonos pietatis iura quam omnes opes ualerent. Medio igitur tempore, dum infans conualescit tutelamque eius administrat, non habentibus Spartanis leges instituit, non inuentione earum magis, quam exemplo clarior: siquidem nihil lege ulla in alios sanxit, cuius non ipse primus in se documentum daret. Populum in obsequia principum, principes ad iustitiam imperiorum formauit. Parsimoniam omnibus suasit, existimans laborem militiae adsidua frugalitatis consuetudine faciliorem fore. Emi singula non pecunia, sed conpensatione mercium iussit. Auri argentique usum uelut omnium scelerum materiam sustulit.

When Lycurgus had succeeded Polydectes his brother, king of the Lacedaemonians, and might have secured the kingdom for himself, he restored it, with the noblest integrity, to Charilaus, the posthumous son of Polydectes, as soon as he became of age; that all might see how much more the laws of integrity prevail with good men than all the charms of power. In the meantime, while the child was growing up, and he had the guardianship of him, he composed laws for the Spartans, who previously had had none. Nor was he more celebrated for the making of these laws, than for his exemplary conformity to them; for he imposed nothing by law upon others, of the observation of which he did not first give an example in his own conduct. He trained the people to be obedient to those in authority, and those in authority to be just in the exercise of their government. He enjoined frugality on all, thinking that the toils of war would be made more endurable by a constant observance of it. He ordered all purchases to be made, not with money, but by exchange of commodities. The use of gold and silver he prohibited, as being the origin of all evil.

Administrationem rei publicae per ordines diuisit: regibus potestatem bellorum, magistratibus iudicia et annuos successores, senatui custodiam legum, populo sublegendi senatum uel creandi quos uellet magistratus potestatem permisit. Fundos omnium aequaliter inter omnes diuisit, ut aequata patrimonia neminem potentiorem altero redderent. Conuiuari omnes publice iussit, ne cuius diuitiae uel luxuria in occulto essent. Iuuenibus non amplius una ueste uti toto anno permissum, nec quemquam cultius quam alterum progredi nec epulari opulentius, ne imitatio in luxuriam uerteretur. Pueros puberes non in forum, sed in agrum deduci praecepit, ut primos annos non in luxuria, sed in opere et in laboribus agerent. Nihil eos somni causa substernere et uitam sine pulmento degere, neque prius in urbem redire quam uiri facti essent, statuit. Virgines sine dote nubere iussit, ut uxores legerentur, non pecuniae, seueriusque matrimonia sua uiri coercerent, cum nullis frenis dotis tenerentur. Maximum honorem non diuitum et potentium, sed pro gradu aetatis senum esse uoluit, nec sane usquam terrarum locum honoratiorem senectus habet.

He divided the administration of the government among the several orders; to the kings he gave the power of making war, to the magistrates the seats of justice in yearly succession; to the senate, the guardianship of the laws; to the people, the power of choosing the senate, or of creating what magistrates they pleased. The lands of the whole state he divided equally among all, that equality of possession might leave no one more powerful than another. He ordered all to take their meals in public, that no man might secretly indulge in splendour or luxury. He would not allow the young people to wear more than one dress in a year, nor anyone to walk abroad in finer garments than another, or to fare more sumptuously, lest imitation of such practices should lead to general luxury. He ordered boys to be carried, not into the forum, but into the field, that they might spend their early years, not in effeminate employments, but in hard labour and exertion; not suffering them to put any thing under them to sleep upon, or to live on high seasoned food, and forbidding them to return into the city till they arrived at manhood. He caused virgins to be married without portion that wives, not money, might be sought; and that husbands might govern their wives more strictly, being influenced by no regard to dowry. He ordained that the highest respect should be paid, not to the rich and powerful, but to the old, according to their degrees of seniority; nor had old age, indeed, a more honourable habitation anywhere than at Sparta.

Haec quoniam primo solutis antea moribus dura uidebat esse, auctorem eorum Apollinem Delphicum fingit et inde se ea ex praecepto numinis detulisse, ut consuescendi taedium metus religionis euincat. Dein ut aeternitatem legibus suis daret, iure iurando obligat ciuitatem, nihil eos de eius legibus mutaturos, priusquam reuerteretur, et simulat se ad oraculum Delphicum proficisci, consulturum quid addendum mutandumque legibus uideretur. Proficiscitur autem Cretam ibique perpetuum exilium egit abicique in mare ossa sua moriens iussit, ne relatis Lacedaemonem solutos se Spartani religione iuris iurandi in dissoluendis legibus arbitrarentur. His igitur moribus ita breui ciuitas conualuit ut, cum Messeniis propter stupratas uirgines suas in sollemni Messeniorum sacrificio bellum intulissent, grauissima se execratione obstrinxerint, non prius quam Messeniam expugnassent reuersuros, tantum sibi uel de uiribus suis uel de fortuna spondentes.

But seeing that such laws would at first be thought severe, as the state of manners had previously been relaxed, he represented that Apollo of Delphi was the author of them, and that he had brought them from thence at the command of the deity, in order that reverence for religion might overbalance the irksomeness of compliance with them. And to secure perpetuity to his laws, he bound the city by an oath “to make no change in them till he should return,” pretending that he was going to ask the oracle at Delphi whether any thing seemed necessary to be added to his institutions, or changed in them. But he went in reality to Crete, and continued there in voluntary exile; and, when he was dying, ordered his bones to be thrown into the sea, lest, if they were taken back to Lacedaemon, the Spartans might think themselves absolved from their oath respecting alteration in his laws. Under such a state of manners, the city acquired, in a short time, such a degree of strength, that, on going to war with the Messenians for offering violence to some of their maidens at a solemn sacrifice of that people, they bound themselves under a severe oath not to return till they had taken Messene, promising themselves so much either from their strength or good fortune.

Can bankers be trained to be obedient to those in authority? Should they take their meals in public? One dress in a year? Would all this make LIBOR become more accurate? Today, the above techniques would probably not prosper. Therefore, Martin Wheatley had to turn to other solutions. His recent report sticks to the following six questions:

  • Should we regulate LIBOR?
  • How should LIBOR be constructed?
  • How could LIBOR’s governance structure look like?
  • Are there alternatives to LIBOR?
  • How should we accomplish the transition period to new regulation?
  • Which sanctions should encompass the new LIBOR fixing?

1. Should we regulate LIBOR?

Yes! “LIBOR administration should also be a regulated activity.”, says the report. In the authors' view, this is necessary to counter the risks of potential manipulation. Not only should the conduct of firms and individuals involved in the LIBOR process be subject to supervison; but regulatory action for misconduct is also necessary.

However, to avoid any uncertainty of interpretation of existing contracts, the intention is to „reform rather than replace“ LIBOR.

On the merits, the new regulation shall cover the production of submissions; the calculation of the benchmark; and its publication.

2. How should LIBOR be constructed?

Martin Wheatley and his team address five major issues as regards LIBOR construction:

  • LIBOR submissions should be explicitly and transparently supported by transaction data. The hierarchy of transaction types to be taken into account looks like this:

  • Over a 12-month transition period, LIBOR's number of currencies and maturities should be reduced. This should apply to those currencies and tenors for which there is insufficient trade data to corroborate submissions and, ultimately, will reduce published benchmarks from 150 to 20.

  • The banks providing LIBOR submissions will need to put in place, at manager level, a „controlled function“ (Whatever this means...) for the LIBOR administration process. Contributors shall come from the banks' liquidity and liability management.

  • Relevant transactions will have to be recorded and individual submissions be published after a three months' period.

  • Sufficiently large panel sizes must be secured through increasing the number of contributors: If necessary, the FSA should have an explicit right to compel LIBOR submissions.

3. How could LIBOR’s governance structure look like?

Today, LIBOR suffers of

  • insufficient independence of governance structures;
  • too heavy reliance on participating banks;
  • limited transparency and accountability.

As a solution and to restore credibility, Martin Wheatley suggests to transfer, through a tender process, LIBOR administration and governance from the BBA to a new administrator. This new administrator should be a private organization rather than a public body. The reason is that a private company will “have a greater incentive to ensure that the benchmark is fit for purpose and evolves to meet the changing needs and nature of the market”. However, rules and guidance for such private administrator shall be set by public authorities.

It will be up to the new administrator to design an internal governance framework. However, the report already specifies the following 2 main features of such future framework:

  • The benchmark administrator will be obliged to analyze and scrutinize submissions from contributing banks.
  • The framework must provide for an independent committee which shall exercise a decision-making and oversight role.

In addition to the governance framework, a code of conduct for contributing banks shall be put in place. This new code of conduct, endorsed by the FSA, must

  • include guidelines for the use of transaction data to determine submissions, while retaining the existing definition of LIBOR based on unsecured inter-bank lending;
  • detail the above described hierarchy of transaction types;
  • provide for internal and external control of submitting firms;
  • request a record keeping of transaction data.

4. Are there alternatives to LIBOR?

The Wheatley report suggests to think about alternatives to LIBOR benchmarks:

  • Lawyers should develop feasible and robust LIBOR contingency provisions in contracts such as ISDA and LMA. The Wheatley commission criticizes the fact that those provisions usually refer to a mechanism that is based on interrogations of reference banks. In its view, this not only questions the practical feasibility in terms of work-load but may also involve exactly the same banks that were not able to provide LIBOR submissions in the first place.
  • Astonishingly, the Wheatley report suggests to reconsider the use of LIBOR in situations where it might not be the most suitable benchmark. For example, the authors consider that there may be no need to refer to LIBOR in derivative contracts intended to manage interest rate exposure. Possible alternatives to LIBOR can be the central bank policy rate, overnight index rates, overnight index swaps, short-term government debt yields, REPO rates, or synthetic rates.

5. How should we accomplish the transition period to new regulation?

The authors argue that the necessary amendments to LIBOR should come into force in 2013, together with the Financial Services Bill.

6. Which sanctions should encompass the new LIBOR fixing?

New enforcement mechanisms and sanctions should be introduced.

First the report thinks highly of EU legislation on market abuse that is currently under review. The central point of today's reforms is to expand the definition of a market abuse to providing false or misleading inputs or otherwise manipulating the calculation of a benchmark.

Second, the report recommends to introduce, at UK level, additional criminal sanctions into the Financial Services and Markets Act (FSMA).

The introductory story shows that setting and applying law are not same.

The Wheatley report is a about setting the structure. For example, the word “process” appears 90 times, more than once per page! Applying it will be another story.

In my view, the report focuses too much on the procedural aspects of setting LIBOR. In the end, it is employees who will submit LIBOR quotes. They must understand the obvious conflict of interest they were exposed to and handle it properly. Besides the usual call for education and training, the report is pretty silent on this issue.


  • The Wheatley Review of LIBOR – Final Report – September 2012

Thursday, October 4, 2012

The defeater of Financial Markets – It's all about politics!

The man on the left is Peer Steinbrück, a German social democratic politician. He will be challenging chancellor Angela Merkel in 2013 when Germany will elect a new government.

As Germany's former finance minister, Peer Steinbrück has issued, on September 25, 2012, a position paper called “Regaining Confidence: A new Undertaking on Defeating Financial Markets”.

I confess, I was attracted by the title... Yes, this simplistic title, thousands of which we have already read in the past few years!

I printed the 30 pages of the paper last Sunday to read them on my way to work on Monday. So here I am, it is Monday 8 am and I wait for my train to La Défense. To get a seat, I let 2 or 3 trains pass by. This is actually enough time to read the introduction.

Peer starts off energetically:

  • The political repression of a finance-driven capitalism is a crucial political challenge of our time.”
  • The pleadings and concepts of a new banking culture of sustainability, long-run perspective, and customer focus are scarce and craven. The system of short-term return maximization paired with a distinctive risk-ignorance does not challenge itself but feels itself wrongly overwhelmed.”
  • The fundamentals of the social market economy are still repudiated, if the costs are born by the community whereas the [finance] industry holds on to its profits, dividend distributions, and bonuses. […] Responsibility and risk fall apart, the privatization of gains is opposed to the socialization of losses.”
  • Financial institutions and corporates are sitting on a branch that the crude financial capitalism and its promoters of market-radicalism are about to cut.”

I elbow my way through the train's door to get a seat. (This is usual in Paris. You only have to say “Pardon” before.) Once seated, I wonder whether I should really continue reading. After all, this seems to be more a pre-election party leaflet than a serious discussion paper. When the train leaves the station, I decide to continue reading, I have nothing else to read anyway.

Steinbrück discusses 6 topics:

  • Introducing a financial transaction tax
  • Abandoning government bail outs for banks
  • Separating corporate and investment banking
  • Supporting public information
  • Taking responsibility
  • Controlling banks

Introducing a financial transaction tax

Steinbrück appreciates the European Commission’s proposals but worries about possible loopholes regarding non-European trading and foreign exchange transactions.

Abandoning government bail outs for banks

To avoid future government bail outs, he suggests

  • bank liquidation funds, on a national level for small and middle sized banks and on a European level for systemic banks, and to be financed by the banks themselves;
  • a European liquidation authority for banks;
  • a liability waterfall in the order equity holders, debt holders, and liquidation fund;
  • a standard European liquidation regulation.

Separating corporate and investment banking

A first proposition relates to proprietary trading: A financial institution that puts proprietary trading into practice should not receive deposits or have access to central bank financing. This would also apply to financial institutions whose subsidiaries practice proprietary trading. However, Steinbrück specifies that trading for risk management purposes shall be exonerated from the scope of application.

A second recommendation relates to universal banks with complex business activities. Peer promotes the adoption of the financial services holding company structure for those institutions. More specifically, financial services shall be carried out by separate legal structures, each equipped with their own equity capital, management, and accounting system. In Peer’s view, this would strengthen not only the transparency of risk and return but also the stability of the financial institutions.

It is now 8h40 pm and I arrive at La Défense. Time to forget Peer’s position paper and to go to work...... on complex business activities of my universal bank!

Supporting public information

The title of Steinbrück's next chapter is „Illuminating the dark.“ This fits well my temper as it is already dark outside when I take the train back home after work.

Five fundamental points are made here:

  • The author suggests to make the regulation of the shadow banking system parallel to the regulation of the banking system itself. This applies especially to minimum capital requirements, due diligence and risk management standards, deposit insurance schemes, and liquidity risk management. This eventual goal of this proposal is to avoid supervision arbitrage.
  • Second, he calls for monitoring the links between the banking and the shadow banking system, namely with respect to refinancing arrangements backed by REPO transactions.
  • Third, the European legislation on OTC derivatives trading should be put in practice as soon as possible. In addition, incentives in form of lower capital requirements should be set for standardizing derivatives contracts and trading them via a central counterparty. In the same vein, commodity forward contracts should be limited to transactions touching on the real economy and credit derivative short selling bans should be extended.
  • Next, Steinbrück turns towards high frequency trading. He recommends a compulsory admission process for trading algorithms and a minimum time period for the validity of orders.
  • Finally, Peer addresses the statute of rating agencies: The conflict of interest caused by the remuneration scheme should be cleared by organizing CRAs as common welfare oriented foundations. Governments should set up a public European rating agency, financed for example by central banks' profits. Lastly, bank-internal rating systems are to be promoted.

Taking responsibility

In this rubric, Peer Steinbrück discusses a variety of topics, all more or less linked to the principle of responsibility banks should incur.

Controlling Banks

Systemic pan-European Banks can only be controlled effectively only by a pan-European supervisory body.”, writes Steinbrück, and refers to the European Central Bank as such supervisory body.

However, he feels that this shall not apply to small and middle-sized banks. They should be controlled by national regulators.

Towards the end of his discussion paper, Peer accelerates again

"Banks are service providers and not casinos, that gamble with other people's money, neglecting the interests of their customers and their capital base to realize extreme returns that flow in the form of bonuses to management and in the form of dividends to shareholders."

Reading Peer’s conclusion, I am almost back where I started off this morning. My train has still some stops to go, leaving some time to think about Steinbrück’s paper:

Save for the introduction and conclusion, I like his writing style. His paper is very clear and you can easily understand his positions.

On the merits, I haven’t noticed any pioneering idea in his position paper. Numerous of the above topics are already regulated or about to be regulated, mostly on a European level. In the end, I think that his initiative is first and foremost a tactical step of his election campaign.


  • Peer Steinbrück – Vertrauen zurückgewinnen: Ein Anlauf zur Bändigung der Finanzmärkte